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02/03/89 Bernard J. Callahan, v. L.G. Balfour Et Al.

February 3, 1989

BERNARD J. CALLAHAN, PLAINTIFF-APPELLANT

v.

L.G. BALFOUR ET AL., DEFENDANTS-APPELLEES



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FIFTH DIVISION

534 N.E.2d 565, 179 Ill. App. 3d 372, 128 Ill. Dec. 383 1989.IL.136

Appeal from the Circuit Court of Cook County; the Hon. Leonard R. Grazian, Judge, presiding.

APPELLATE Judges:

JUSTICE PINCHAM delivered the opinion of the court. LORENZ, J., concurs. PRESIDING JUSTICE MURRAY, Dissenting.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE PINCHAM

Plaintiff, Bernard Callahan (Callahan), brought this action against defendant, L.G. Balfour company (Balfour), for breach of contract and fraud. Balfour filed a counterclaim against Callahan for breach of contract. The trial court granted Balfour summary judgment on Callahan's breach of contract claim against Balfour. Callahan's claim against Balfour for fraud and Balfour's counterclaim against Callahan for breach of contract were jointly tried before a jury. The jury rendered a verdict against Callahan on his fraud claim and a verdict on behalf of Balfour on its counterclaim against Callahan for breach of contract. The trial court denied Callahan's motions for judgment notwithstanding the verdict and a new trial. Callahan appeals. We reverse.

Callahan's breach of contract claim against Balfour alleged that Balfour, a manufacturer of high school rings, diplomas and other school items, wrongfully terminated Callahan's employment with Balfour as a sales representative and that Balfour owed Callahan $186,686 in commissions and equity payments that Callahan earned as a sales representative. Balfour defended on the grounds that Callahan's employment contract was terminable at will, that Callahan accepted employment with Balfour's competitors within two years after he was discharged from Balfour, that a covenant not to compete in Callahan's employment contract prohibited him from doing so, and that a clause in the covenant not to compete allowed Balfour to retain Callahan's commissions and equity payments as liquidated damages for Callahan's breach of his employment contract.

Callahan's fraud claim against Balfour alleged that Balfour induced Callahan to continue working as a Balfour sales representative by promising Callahan that none of his accounts would be reassigned to other salesmen without his consent when Balfour knew at that time it made the promise to Callahan that Balfour had already reassigned three of Callahan's major accounts to two new sales representatives.

Balfour's breach of contract counterclaim against Callahan alleged that Callahan owed Balfour $36,431 for school rings and other school items which were advanced to Callahan by Balfour.

The trial court granted summary judgment on behalf of Balfour on Callahan's breach of contract claim based on the covenant not to compete in Callahan's employment contract.

The pertinent facts adduced at trial on Callahan's fraud claim against Balfour and Balfour's breach of contract counterclaim against Callahan follow. In 1955, Callahan began working as a regional sales representative in Chicago for Balfour. In 1979, Balfour negotiated tentative employment contracts with prospective regional representatives Thomas Young and James Coleman. As a condition of accepting employment at Balfour, Young required the assignment to him of two accounts, the Morton East and Morton West High Schools, which were then assigned to Callahan. As a condition of accepting employment at Balfour, Coleman insisted that the Carl Sandberg High School account, which was also then assigned to Callahan, be assigned to him.

Balfour maintained at all times that it would not seek to reassign any of Callahan's active accounts or the inactive accounts upon which Callahan was "aggressively calling." On July 16, 1979, and September 15, 1979, and numerous other occasions, Balfour assured Callahan that none of his accounts would be reassigned without his consent. However, prior to September 15, 1979, Balfour reassigned Callahan's Morton East and Morton West accounts to Young and Callahan's Sandberg account to Coleman. Callahan had constantly called upon these schools in recent years, but had lost bids to sell rings to them. Balfour complained that Callahan's coverage of these schools was inadequate, but only after Balfour terminated Callahan's employment in March 1980. Within two years of his discharge from Balfour, Callahan worked for two of Balfour's competitors. I

Callahan first contends on appeal that the trial court erred in granting summary judgment on behalf of Balfour on counts II through V of Callahan's complaint. Counts II through V stated a claim of breach of the employment contract and sought damages totaling $186,686, which Callahan alleged he earned in commissions and equity payments. Balfour argued that Balfour was not liable to Callahan for the commissions and equity payments because Callahan breached a covenant in his employment contract not to compete by working for two of Balfour's competitors within two years after his discharge from Balfour, and therefore, by reason of a liquidated damages provision contained in the covenant not to compete, Balfour contended that Callahan forfeited his commissions and equity payments.

The covenant not to compete in Callahan's employment contract states:

"In the event of the termination of this Contract for any reason, the Regional Representative agrees that for a period of two (2) years after such termination, he will not directly or indirectly, for himself, or as an agent of, or in behalf of, or in conjunction with any person, firm association, or corporation, sell or solicit orders for any other merchandise of the kind or character manufactured, or sold by Balfour within the territory that had been assigned to the Regional Representative. In addition to any equitable remedies to which Balfour may be entitled, Balfour may withhold as liquidated damages any sums that may be due from Balfour to the Regional Representative."

In Donow v. Board of Trustees (1974), 21 Ill. App. 3d 139, 314 N.E.2d 704, the court considered whether the defendant was entitled to withhold plaintiff's paychecks as liquidated damages. The defendant argued that the money withheld from the plaintiff's paychecks was liquidated damages. The defendant argued that the money withheld from plaintiff's paychecks represented a penalty for the plaintiff's violations of the university's traffic rules. The court stated:

"First, there is no sum certain stipulated for specific offenses. . . . Liquidated damages must generally be for a sum certain for a specified breach. [Citation.] Secondly, liquidated damages are usually considered to be paid in lieu of performance and are not specifically intended to secure performance of the provisions. . . .

Under the circumstances . . . the assessments section is the equivalent to a penalty clause. The courts of Illinois lean toward this construction of provisions of this sort . . . and rather treat such clauses as penalties which will not be enforced, the aggrieved party being able to recover actual damages only." Donow v. Board of Directors (1974), 21 Ill. App. 3d 139, 148, 314 N.E.2d 704.

The aforementioned covenant not to compete in the case at bar provides that Balfour "may withhold as liquidated damages any sums that may be due" to Balfour if the regional representative, Callahan, breaches the covenant. Callahan earned commissions on orders for rings which he sold for Balfour. Callahan also earned equity payments under a program which provided for the orderly transfer of territory from a retiring regional representative to a new regional representative with a percentage of the successor representative's commissions credited to the retiring representative's commissions. The commissions and equity payments could vary significantly depending on the number of orders the regional representative placed and the date the accounts were reassigned. Thus, the liquidated damages provision failed to state a sum certain to be forfeited. Additionally, the liquidated damages were not assessed in lieu of Callahan's performance, but were specifically intended to prevent Callahan from accepting employment with Balfour's competitors.

For a liquidated damages provision of a covenant not to compete to be enforceable, the damages resulting from breach of the covenant not to compete must be difficult to calculate and the amount of the fixed damages must be a reasonable forecast of the damage likely to occur. Both elements must be present. Otherwise, the provision will be construed as a penalty. Bauer v. Sawyer (1956), 8 Ill. 2d 351, 359.

The amount of commissions and equity payments Balfour owed to Callahan varied with the number of orders Callahan and his successor placed, rendering the damages difficult to determine. However, for the liquidated damages provision of the covenant not to compete must also be enforceable, the amount of fixed damages which Balfour set forth in the covenant not to compete must also be a reasonable forecast of the damages likely to occur from Callahan's employment with Balfour's competitors.

In Bauer, the partnership agreement provided that when a physician left the partnership the remaining partners would purchase the departing physician's interest at a certain rate, which rate would vary according to whether the physician's departure was voluntary or involuntary. The agreement further provided that a physician who breached the covenant not to compete would forfeit, as liquidated damages, any forthcoming sums due him. The court held that this liquidated damages provision was a penalty and therefore unenforceable. The medical partnership was required to remit to the departing physician his remaining interest in the partnership.

Likewise, in the instant case the variation in the amount of commission and equity payments which could enure to Balfour as damages rendered the liquidated damages provision ineffective as a reasonable forecast of the actual damages Balfour would suffer from Callahan's breach of the covenant not to compete.

Illinois courts encourage fair competition in business and abhor restraints on trade, and covenants in employment contracts not to compete are carefully scrutinized. A restrictive covenant may be held enforceable if the time limit and geographical scope are reasonable, if confidential information or trade secrets are involved, and if the restriction is reasonably necessary for the protection of a legitimate business interest. (Image Supplies, Inc. v. Hilmert (1979), 71 Ill. App. 3d 710, 713, 390 N.E.2d 68.) Only two such business interests have been recognized by the courts, a near permanent customer relationship and confidential information. Lincoln Towers Insurance Agency v. Farrell (1981), 99 Ill. App. 3d 353, 425 N.E.2d 1034.

Neither interest is present in the instant case. The evidence established that many salesmen competed to sell rings to schools that were assigned to Callahan and that a salesman who won at a school one year could lose the bid to a competitor at that school the next year. Balfour, therefore, cannot persuasively claim that it enjoyed a near permanent customer relationship with any school that was assigned to Callahan.

Balfour's claim that Callahan possessed confidential information for which Balfour required the protection of a restrictive covenant is fallacious. The names and addresses of Balfour's high school customers were generally known and readily ascertainable by Balfour's competitors and therefore certainly were not confidential. Neither were Balfour's prices confidential, since they were determined by the regional representative and could be obtained by anyone who contacted and asked the schools.

Neither can Balfour be said to have a protectable business interest in Callahan's familiarity with the high schools assigned to Callahan. A salesman's knowledge of or familiarity with customers is very similar to his personal skills and therefore cannot be considered the property or protectable interest of his employer. ...


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